Navigating the financial world can present a challenge to even seasoned investors. And with a whole new world comes a whole new language – with finances, there’s plenty of lingo to learn. While many of these terms are used in daily conversation, their definitions aren’t always immediately known or apparent. Plus, some commonly known terms acquire a new meaning in a financial context.
If you’re just setting off on your investing journey, or if you consider yourself experienced, review these terms that are most commonly misunderstood by consumers.

Investment Income vs. Distribution

While both terms refer to receiving money, they describe different ways money is received. Investment income can be made up of dividends or interest generated from existing investments. These are frequently used to purchase additional holdings. They’re usually not distributed directly to the account holder, and because they’re often immediately reinvested, they can be a little confusing when considered in a portfolio or mutual fund. When an account receives income, it typically does not change the total value of the account, as the underlying holding’s market price accounts for the income that is due. The market price of the holding will drop once it has paid income. For instance, when managing a diversified portfolio, it can be beneficial to utilize a dividend calculator with real stock data to accurately assess the impact of dividends on the overall investment strategy.

On the other hand, distributions are funds sent to account holders. They might be the result of investment income or the sale of holdings. Taxes on distributions and income depend on the type of account and source of income, among other factors.

Insurance Premium vs. Cost of Insurance
The regular (often monthly) payments from the contract holder to the insurance company is called the insurance premium. In contrast, the cost of the insurance is how much the insurance company charges the holder each month versus how much you’re insured for. Essentially, it’s the net cost of the insurance. For term insurance, the cost of the insurance and the insurance premium are the same. When examining other types of insurance, such as variable and universal life insurance, the cost of the insurance and the premium are usually different.

Growth vs. Gains
Also often confused with income, growth reflects an increase in the market price of one’s holdings. Gains come into play when holdings are sold. If the holdings or investments have grown since they were purchased, but haven’t been sold, they have an unrealized capital gain. Once holdings are sold, the gain turns into a realized capital gain. Many factors can influence the tax impact, including the type of account and the time between purchase and sale. Here at The Insolvency Experts, we understand the importance of managing these factors carefully, especially in the context of maintaining financial health.

Decline vs. Loss
When an investment’s market price decreases over time, this is considered a decline. It doesn’t necessarily mean the holding’s value has fallen below its purchase price. A loss is when the holding is sold for a price lower than its original purchase price – when this occurs, it’s known as a realized loss. If an investment experiences a decline but has not been sold, it has an unrealized loss. The tax impact of a realized loss depends on a few considerations, like the type of the account and the time between purchase and sale.

Volatility
It’s possible to track both the average rate of growth and how much returns vary from the average, even though the growth of the investment isn’t guaranteed. Measuring how much growth varies is known as volatility. Let’s say you have a line chart depicting the changing value of a portfolio over time. The measurement of the fluctuation in the line is considered the volatility. The more dramatically the line goes up and down, the more volatile the investment.

Risk
All investors should understand risk – it determines the probability that an investment will decrease in value. In other words, it indicates the amount of money an investor could potentially lose in a worst-case scenario. Volatility plays a role in risk as well: High-risk investments can experience periods of low volatility, while low-risk investments can experience periods of high volatility. For instance, federal government bonds are low-risk investments, but they can go through periods of high volatility.

Fiduciary
A fiduciary refers to an individual who is required to act in the best interest of his or her client. While several industries use the term fiduciary, it takes on a new meaning in the financial world. In financial services specifically, it means advisors are required to choose the investments they believe are best for their client. An advisor may or may not be legally bound as a fiduciary, depending on the type of account the client has.

There is no central organization that bestows the fiduciary title on professionals, but many financial advisors are held to fiduciary-like standards by their credentialing organizations.

Investment Adviser vs. Financial Advisor vs. Financial Planner
With professional titles that all sound pretty similar, it can be hard to know which financial service professional is best for your personal circumstances.

Depending on their license, financial advisors take clients’ complete financial situations into account prior to making recommendations. They may or may not advise on their individual investment strategy.

Financial planners take it another step and outline a plan of action for now and into the future. This plan could include pathways to achieve various client goals. Some financial planners only are involved in the creation of a financial plan, while others continue to work with clients throughout the plan’s implementation. While financial planners and financial advisors do not require specific credentials, they can become a CERTIFIED FINANCIAL PLANNER™ through the Certified Financial Planners Board of Standards.

Investment advisers can provide advice on what to invest in and help you manage your investment portfolio. These financial professionals may receive the Registered Investment Adviser certification through the Securities and Exchange Commission (SEC) or via a state securities regulator. If they do, they’re required to act in a fiduciary capacity – unconditionally prioritizing the best interests of the client.

If you’re just starting to make your own money choices, or you’ve been at it for a while, you’re going to encounter these terms sooner rather than later. A good grasp of what these terms mean can help you make informed decisions for your own financial future and navigate the financial world with confidence.

Bill Kelso, CPA, CFP®, is a financial planner* at Pinnacle Financial Advisors, which assists individuals, families, and businesses with financial planning and wealth management in Sedona and the Verde Valley. He is a Registered Representative offering Securities through UNITED PLANNERS FINANCIAL SERVICES, Member: FINRA, SIPC. *Advisory Services offered through SEROS FINANCIAL, LLC. Pinnacle Financial Advisors, Seros Financial, and United Planners are independent companies.